Oil politics in the new Iraq

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Abstract

Iraq is one of the world’s major oil suppliers, and over ninety percent of its government revenues come from oil exports. Developing an oil management strategy that politicians from all sects and ethnic groups can agree on is therefore paramount to the future political and economic health of the Iraqi state. Yet the new Iraqi government cannot agree on a comprehensive hydrocarbons framework that would allocate oil ownership rights and share revenues eight years after the overthrow of Saddam Hussein. One major political battle preventing Iraq from developing its hydrocarbons industry is over the nature of federalism among all of the sects battling for oil wealth in Iraq. This paper focuses primarily on the issue between Kurds and Arabs, because the Kurds have actively promoted oil exploration. The Kurdistan Regional Government (KRG) is now a constitutionally-protected region, and has signed 37 production sharing agreement contracts with international oil companies. The federal government in Baghdad deems these contracts illegal. The KRG and Baghdad also cannot agree on the borders for the region, as both sides claim oil-rich Kirkuk. This paper analyses major developments in the KRG and Baghdad oil industries since 2003 and examines possible future scenarios for the country’s oil sector. Drawing on international lessons learned from other oil-rich divided societies such as Nigeria, Sudan, Indonesia, and the United Arab Emirates, the paper suggest that oil ownership and revenue allocation should be decentralized to reduce secessionist pressure. The paper concludes with recommendations that the government needs to not only take care of obvious issues such as resolving ambiguities in the constitution and passing comprehensive hydrocarbons legislation, but it also needs to address export agreements and institute measures to ensure transparency. The KRG needs to develop its own oil industry, complete with access to export pipelines, and should be allowed to keep a higher percentage of KRG oil revenue over its current 17%. Iraq needs international mediation to resolve issues on Kirkuk and should also make innovative changes to the structure of its national oil company. These changes will facilitate the proper investing of oil wealth for future generations of Iraqis.